The recent rapid increase in the price of cryptocurrencies has resulted in many experts calling it a bubble and advising caution while investing.
Bubble-like Characteristics
The growth in the valuation of cryptocurrencies in 2017 has been unprecedented. Bitcoin price has more than tripled in value, going from $900 in Jan 2017, to over $2,500 as of now. This pales in comparison to Ethereum’s gains. Ether price has risen from ~$8 in January 2017, to $350 currently, a gain of over 4000 percent. Other cryptocurrencies too have risen multifold in value, leading to natural apprehensions of a cryptocurrency bubble.
Gold Rush Mindset
Aberdeen believes that we are currently in the midst of a cryptocurrency bubble and its bursting is inevitable. Speaking to Bloomberg, Peter Denious, head of global venture capital at Aberdeen Asset Management Plc, said: “Prices right now aren’t being driven by network usage, they’re being driven by speculation that tokens are going to appreciate. It’s a gold-rush mentality.” The proliferation of ICOs and the rapid increase in the price of tokens upon listing is one of the indicators of a bubble. Companies in the Blockchain space seem to have no difficulties in raising money quickly through ICOs, even if they do not have a proven or unique idea behind their token.
Other Assets at Record Levels
While the returns on cryptocurrencies in 2017 is unparalleled, other asset classes have risen too. Equity indices like Nasdaq and S&P 500 are at record levels, in spite of the uncertainty in global markets. Housing prices have largely recovered from the previous burst. One reason for the increase in prices is the ample liquidity in global markets, caused by quantitative easing by various central banks. While the cryptocurrency bubble may burst, it might not be the only one to do so. Past global crises have shown that the effect of a real estate or widespread equity bust can have long-lasting effects on the economy.
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